Mar 25, 2024 | HILJ-HIALSA International Arbitration Collaboration, Online Scholarship
Abdelhameed Dairy*
Introduction
The paper critically assesses the contemporary challenges facing the international investment regime, concluding that urgent reform is needed. It argues for abandoning Bilateral Investment Treaties (“BITs”) as the prevailing tools. The first part of this article characterizes the regime as an “imbalanced bargain” and highlights the regime’s inability to achieve objectives, leading to regulatory chill and hindering sustainable development goals. The second and third parts of the article propose a novel reform approach centered on the doctrine of acquired rights within a domestic legal framework, offering a comprehensive solution to existing challenges. The researcher advocates for terminating BITs, emphasizing the need for transformative legal adjustments to address the regime’s shortcomings. The methodological approach aligns with Sauvant’s emphasis on understanding the regime’s purpose as a foundation for meaningful reform discussions.
I. Background and Objectives
The global response to enhancing protection for foreign investors, framed as a “Grand Bargain,” has been subject to critical examination (Kaushal 2009; Salacuse and Sullivan 2005). Asha Kaushal revisits the history of the foreign investment regime to illuminate the present backlash against the regime, shedding light on its historical underpinnings. Kaushal’s findings underscore the tensions inherent in the BIT architecture, revealing a disconnect between the intended benefits of BITs and their actual impact on foreign investment flows (Kaushal 2009, p. 492-496). While these treaties were originally envisioned as a means to attract investment by trading regulatory sovereignty, recent studies suggest that they may not significantly influence investment patterns. Moreover, Kaushal argues that the real bargain underlying BITs involves developing countries relinquishing sovereignty in exchange for enhanced protection of foreign property and contract rights (Kaushal 2009, p. 495). This nuanced understanding of the BIT regime challenges traditional binary structures and highlights internal contradictions within the investment arbitration framework. Jeswald Salacuse and Nicholas Sullivan, in their evaluation of bilateral investment treaties, question the efficacy of the grand bargain inherent in these treaties (Salacuse and Sullivan 2005, p.77). The perceived imbalance in this arrangement stems from three key factors: states’ choice to enter into investment treaties in a “blind bargain” without full certainty as to their effects, provision of ‘more than just” protection for investments, and restrictions on the State’s right to regulate.
A. A Blind Bargain: A Historical Perspective
The historical evolution of international investment law, rooted in the assumption that BITs would spur economic development through increased foreign direct investments, is increasingly questionable (Kenneth Vandevelde 2009, p.21; Hallward-Driemeier 2003). The lack of empirical evidence supporting this assumption (Dolzer and Schreuer 2012, p. 23; Salacuse and Sullivan 2005, p.17) transforms entering the commitment to BITs into a speculative gamble. The early 1990s marked a shift toward neoliberal economic policies and the establishment of BITs, guided by the belief that they would foster economic development (UNCTAD 2006, p. 2, 6).
However, the paper contends that this anticipated correlation between BITs and economic development lacks empirical support. Hence, it characterizes the treaties as “blind bargains”. The paper also aligns with the view that while investment protection is an important objective, its direct translation to promotion and liberalization is not always guaranteed (UNCTAD 2003, p. 89).
B. More than Extra Protection
The surge in costly arbitration claims against host states, exceeding initial expectations, forms the second facet of the imbalanced bargain. This rise in claims, attributable to the expansive scope of BITs and their broad definitions of investments—such as in Joy Mining v Egypt (para. 45)—prompts a critical examination. Significantly, the origins of BITs are also implicated, with some arguing (Miles 2010) that the focus on investors’ interests may have led to the neglect of the host state’s interests. The unique privilege granted to foreign investors to initiate legal proceedings against host states is explored, emphasizing the need to redefine investments for better precision.
Upon revisiting the shared objectives of the regime and exploring its history, it is apparent that BITs were embraced with a specific goal: advancing the economic development of host states. This distinguishes BITs from human rights conventions. BITs focus on safeguarding investors’ property (Dolzer and Schreuer 2012, p. 60). The deliberate choice of developing countries to limit BITs to future investments highlights their core aim of promoting future Foreign Direct Investment (“FDI”), which contributes significantly to economic development Salacuse and Sullivan 2005, p. 80). Unfortunately, the lack of a precise objective definition in BITs’ preambles often leads to the inadvertent inclusion of potentially detrimental investments (UNCTAD 2011, pp. 1-13). This drafting oversight may stem from the novelty of this legal field, as acknowledged in the ICSID Convention (Mihaly International Corp. v. Democratic Socialist Republic of Sri Lanka, para. 33).
As we consider the focus of the next chapter of investment protection, a crucial question arises: is the optimal avenue for developing investment law through BITs or domestic law? Host states have, over time, attempted a political approach to rebalance the “bargain” by modifying definitions in BITs (Kenneth Vandevelde 2009, pp. 186-187). Arbitral tribunals, adopting a legal approach, refine their interpretation of “investment”. This approach is exemplified in the Fedax v. Venezuela case which employs a “criteria approach” to define investments and establish prerequisites for protected investments. The Salini v. Morocco case, known for creating the “Salini Test”, sets criteria for an investment’s eligibility. However, a recent divergence of opinion among tribunals, particularly regarding the development clause, indicates ongoing debate. (Victor Pey Casado and President Allende Foundation v. Republic of Chile, L.E.S.I. S.p.A. and ASTALDI S.p.A. v. République Algérienne Démocratique et Populaire; Inmaris Perestroika Sailing Maritime Services GmbH and Others v. Ukraine). The development clause, often included in investment agreements and BITs, aims to ensure that foreign investment is not protected unless it contributes positively to the economic, social, and environmental development of the host country.
In summary, host states, aiming to foster economic development, have provided additional protection for foreign investments through BITs. Despite efforts to rebalance the “bargain”, harmful investments still receive extensive protection, challenging sustainable development goals. To address this, a proposed solution involves establishing a “sustainable foreign direct investment definition” which excludes detrimental investments from BIT protection. Our proposal of domestic law solutions—explored later—offers a more effective mechanism for excluding harmful investments.
C. The State’s Right to Regulate
The third element of the “imbalanced bargain” focuses on the constriction of the state’s right to regulate by BITs. While protecting foreign investors from unfair measures is acknowledged, our suggestion delves into the challenge of distinguishing between opportunistic and bona fide regulatory measures. The legitimacy crisis surrounding the regime, and particularly the threat of regulatory chill, is discussed. These concerns arise from the difficulty in balancing the protection of foreign investors with the state’s regulatory autonomy, leading to potential reluctance in enacting or enforcing regulations perceived as necessary for public welfare.
This paper advocates for the termination of BITs, emphasizing that they have failed in achieving their objectives. The imminent termination of BITs is evidenced by states initiating the process in response to the prevailing legitimacy crisis. This proposal advocates a shift from international to domestic law, offering a pragmatic solution to core issues, and preserving international arbitration but introducing a doctrinal gateway for consistency.
II. The Doctrine of Acquired Rights
Our proposal advocating domestic law as an alternative to BITs is based on the doctrine of acquired rights. The concept of acquired rights is a legal principle that protects rights which have already been acquired or established by individuals or entities under the law. It is a pivotal element within our suggested domestic investment law.
A. International Doctrinal Confirmation
Anticipating criticism about the shift from international (BITs) to national (domestic law), we address the key question of state succession’s impact on “acquired rights”. Affirmed by international tribunals, this principle, rooted in public international and municipal law, gained legitimacy in the landmark Saudi Arabia and Aramco case (see also Golâenberq; Permanent Court of International Justice). The doctrine of acquired rights was historically controversial because newly independent Global South states perceived it to threaten their sovereignty. However, this controversy largely evaporated in the early 1990s as developing and developed countries came into agreement over the importance of Hence, I argue for a revival of the acquired rights doctrine. Apart from the historical controversies on the application of this doctrine in the international sphere and considering that in our proposal the disputes between host states and investors shall be settled through international arbitrators, the international formal recognition of the doctrine is attached to its importance in the field of investment law and confers upon its legitimacy in content and principle.
B. The Content of the Doctrine
The doctrine of acquired rights typically prevents governments or other parties from retroactively changing laws or regulations in a way that would deprive individuals or entities of rights they have already obtained. Initially, the doctrine was a safeguard against state interference with property rights, and has international recognition. Our proposed National Foreign Investment Law (“NFIL”) safeguards FDIs against post-investment regulatory changes. The scope of acquired rights within the NFIL is limited to rights explicitly acquired through it. We propose a definition encompassing tangible and intangible rights, aligned with NFIL standards. As compared to stabilization clauses, NFILs better ensure alignment with host state constitutional principles.
C. Acquired Rights and Sustainable Development in National Foreign Investment Law (“NFIL”)
In our proposed NFIL, the concept of “right” within “acquired rights” is pivotal. Valid legal rules establishing rights would seamlessly align with sustainable development goals due to the hierarchy of norms. The NFIL, being more adaptable than BITs, would be crafted to appeal to non-governmental organizations (NGOs) by incorporating constitutional principles. To exemplify, if principles like environmental protection are embedded in the host state’s constitution, any investor rights conflicting with these principles would be null and unconstitutional. This aligns investor interests with the host state’s constitutional values, increasing predictability for investors and fostering sustainable and responsible FDIs. As a result, the proposed regime aims to contribute to sustainable development goals by advocating for sustainable FDI rather than merely more FDI. Moreover, it has been noted that it is more beneficial for investors to conduct economic policies that reconcile with their stakeholders’ interests and hence avoid criticism of societies and NGOs.
In defining “acquired” within “acquired rights”, the distinction between pre-establishment and post-establishment rights is crucial. Our proposal addresses concerns around pre-establishment rights. We suggest that NFIL should refrain from granting such rights. Host states not obligated to admit foreign investments (Droit international économique. Dalloz 2003, pp. 361-365), gain more control over FDI inflow without compromising fairness. The absence of pre-establishment rights in NFIL avoids an overly liberalizing perception and allows states to tailor liberalization levels to their policy stances.
D. Stabilization Clauses and the Doctrine of Acquired Rights
Our proposal centers on activating the doctrine of acquired rights in the NFIL, akin to stabilization clauses but with notable distinctions. Stabilization clauses, often criticized for hindering sustainable development, freeze a broad scope of regulations (and sometimes freeze the whole legal framework) at the time of the investment. In contrast, our concept of acquired rights focuses on freezing specific regulations and offers more precise control. The proposed “right” concept, mandating alignment with constitutional principles, echoes suggested remedies for stabilization clause shortcomings related to environmental and social considerations.
In essence, our NFIL approach strikes a balance: it promotes sustainable FDI by aligning investor rights with host state values, avoids broad pre-establishment rights, and offers a nuanced alternative to stabilization clauses.
III. Domestic Law as an Alternative and a Solution
Following the examination in Part I, this Part questions the relevance of BITs and explores domestic law as an alternative. It proposes two remedies for investor disputes: an Investor-State Dispute Settlement (“ISDS”) clause within the NFIL and the theory of acquired rights. Domestic law, viewed through the lens of other legal frameworks like labor law, offers a stable source for managing host state-investor relationships. The chapter underscores the equivalence of domestic law to BITs’ goals and its effectiveness as a superior instrument.
A. Investor Remedies in Domestic Law
Our suggestion of a NFIL proposes incorporating an ISDS clause into the NFIL and utilizing the theory of acquired rights. It contends that domestic law can offer a stable legal framework, addressing investor concerns and facilitating long-term relationships between investors and host states. The next section challenges the notion that domestic law lacks stability and emphasizes the importance of aligning investor interests with host state constitutional principles.
B. Serving the Same Objectives
Comparing domestic law to BITs, our proposed NFIL represents a credible legal framework, providing stability, predictability, and precise obligations. The NFIL with ISDS clauses contributes to investment liberalization by supplanting the Most Favored Nation (“MFN”) treatment (in principle) with a standardized legal framework. The NFIL, characterized by its legal structure comprising general and abstract rules, encompasses all foreign investors within a unified legal framework. Consequently, it supplants the MFN standard of protection by incorporating all foreign investors falling under the definition of investment in the relevant NFIL, irrespective of the BITs their home country has established with the host state.
In the pursuit of a solution to balance investor protection and regulatory flexibility, the next section focuses on the role of domestic law. Our approach suggests a distinction between investors’ rights and privileges while maintaining the state’s right to regulate.
C. The State’s Right to Regulate
The suggested NFIL would offer a framework to differentiate between compensable and non-compensable measures. A NFIL should define investors’ rights and privileges at the time of investment, ensuring that acquired rights remain unchanged, while privileges, such as the renewal application for operating a hazardous waste landfill, may be subject to legitimate regulatory changes.
Regarding general regulatory measures, the NFIL allows states to enact measures for public interest reasons without arbitration concerns provided they do not infringe on acquired rights. This grants host states the flexibility to adjust policies for future investors without being bound by previous investors’ rights.
Privileges obtained by investors can be modified for public interest, yet opportunistic changes may lead to compensation claims. The NFIL’s meticulous drafting is essential to clearly define the scope of acquired rights, minimizing potential debates.
D. Achieving a Multilateral Agreement on Investment (“MAI”)
Our proposed NFIL serves as a potential solution for achieving a MAI by fostering consensus on standards of protection. By allowing states to freely compete within their domestic laws, regulatory competition emerges. This competition encourages jurisdictions to attract FDI by adopting protective frameworks in their NFIL.
The concept of “regulatory competition” within domestic law enables states to compete for FDI with shared objectives, such as protecting, attracting, and liberalizing investment. Countries could compete to attract FDIs by incorporating an extensive Fair and Equitable Treatment standard of protection in their NFIL. This form of competition through domestic law has been witnessed previously, such as in tax law competitions enacting lower minimum wages for employees compared to other countries, or enhancing flexibility in the labor market.
Some may argue that this competition results in a “race to the bottom” on environmental standards. However, as well as a “Delaware effect”—a race to the bottom with regard to lax restrictions—competition might alternatively result in a “California effect” —a race to the top with regard to restrictions on corporations.
Eventually, regulatory competition will reveal which tools work better to achieve the common objectives, as with different approaches competing through the NIFL, some will witness failure and others will witness success in attracting investment. As a result, states with approaches that have failed will tend to duplicate the approaches that have succeeded until we attain a consensus on at least fundamental substantive content, and hence regulatory competition will pave the way to attain a MAI on the substantive level.
In summary, the proposed domestic law approach offers a balanced mechanism, allowing states to regulate for the public interest while maintaining a competitive environment for attracting FDI. This perspective aligns with the principles of regulatory competition and has the potential to pave the way for a multilateral consensus on investment standards.
Conclusion
The international investment law framework, aimed at promoting FDI and ensuring its protection, faces a crisis due to insufficient empirical support, unintended extra protection through BITs, and concerns about encroachment on host states’ regulatory rights.
In light of these challenges, terminating BITs is essential. Domestic law is a superior tool. Domestic law can achieve common goals, remove constraints on regulatory capacity, and align with global sustainable development objectives. It also serves as a crucial step towards a multinational investment agreement, providing a standardized legal framework for international investment law.
*Abdelhameed Dairy is a seasoned legal professional with expertise in case management, legal research, and client relations.
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Mar 24, 2024 | HILJ-HIALSA International Arbitration Collaboration, Online Scholarship
Arijit Sanyal* and Eshan A. Chaturvedi**
Introduction
Environmental and international investment law was a tale of two cities until the onset of climate change. However, the overlaps have visibly increased and conflicted ever since states and international organizations began to address climate change through reforms such as the Paris Agreement and the E.U.’s Green Deal. Notwithstanding the adoption of environmental reforms, implementation has not been smooth due to resistance from investors claiming to be affected by environmental reforms. This resistance has resulted in a rise of Investor-State Dispute Settlement (“ISDS”) claims against states, leading to regulatory chill (¶ 50). Among other measures to limit such claims, states have inserted environmental carve-outs (“carve-outs”) into their respective treaties, inspired by Article XX of the General Agreement on Tariff and Trade (“GATT”), which immunize certain environmental reforms from challenge.
However, GATT-inspired carve-outs have not been effective because ISDS tribunals have continued to hold states responsible for violation of treaty provisions and award compensation to investors—as in Infinito Gold v. Costa Rica and Eco Oro v. Colombia. The ineffectiveness of carve-outs may lead to concerns for countries like India, whose model bilateral investment treaties and free trade agreement investment chapters (“Investment Instruments”) contain similarly worded provisions. Further, India has been engaged in negotiating several new Investment Instruments. However, these developments come when India has undergone several environmental mishaps in the last few years alone.
Thus, the Government of India may contemplate stricter environmental reforms which could encroach upon investments in the energy sector. Against this backdrop, this article discusses why GATT-inspired carve-outs contained in Investment Instruments may no longer be viable. Further, the article proposes a model of carve-out based on Environmental Impact Assessments (“EIA”) which excludes certain claims from the scope of ISDS and makes provision for them to be referred to an alternative mechanism within the framework of the concerned Investment Instrument.
I. Lost Opportunities for GATT-Inspired Carve-Outs
GATT-inspired carve-outs have been put to test in Infinitio Gold and Eco Oro, where claims were initiated for breaches of the Fair and Equitable Treatment (“FET”) standard and other treaty commitments due to environmental measures adopted by Colombia and Costa Rica. Despite attempts by Colombia and Costa Rica, the tribunals did not preclude compensation and stated that the carve-out could not be allowed to operate in a way that overrides treaty provisions dealing with FET.
The carve-out contained under Article 2201(3) of the Canada-Colombia Free Trade Agreement (“Canada-Colombia FTA”) provides that:
“. . . [N]othing in this Agreement shall be construed to prevent a Party from adopting or enforcing any measure necessary: a) to protect human, animal or plant life…include environmental measures necessary to protect human, animal or plant life and health . . .” (emphasis added).
In Eco Oro, Colombia argued that Article 2201(3) of the Canada-Colombia FTA was meant to exclude measures adopted to address environmental concerns. Colombia therefore urged the tribunal to not grant compensation for measures covered by Article 2201(3). However, the Tribunal observed that the text of Article 2201(3) of the Canada-Colombia FTA did not preclude the payment of compensation for violation of treaty provisions (¶ 367). The Tribunal further observed that if the parties intended to exclude any liability from their actions, the provisions of the respective treaties should have been drafted to reflect this intent (¶¶ 368-369). Consequently, the Eco Oro tribunal concluded that Article 2201(3) was meant to shield environmental measures and that the investors could not ask for restitution. But the provision’s ordinary meaning did not preclude the award of compensation when environmental measures violated FET standards.
This view aligns with that expressed by the Infinitio Gold tribunal, which found that whilst Annex 1, Section III(1) of the Canada-Costa Rica Free Trade Agreement affirmed a state’s right to regulate, it could not be understood to override substantive treaty provisions. Further, the Infinitio Gold tribunal affirmed that exceptions had to be interpreted to balance investor and environmental protection. The abovementioned interpretations indicate that GATT-inspired carve-outs have not been interpreted to exclude compensation for breach of treaty provisions. On the contrary, the abovementioned awards may have created an impression that GATT-inspired carve-outs are meant to bail out states for breach of treaty provisions, whereas the provisions’ real purpose is to exclude certain actions from the scope of ISDS.
II. Have Carve-Outs Hit a Dead-End?
Eco Oro and Infinitio Gold indicate that GATT-inspired carve-outs may not be the most effective way to exclude environmental measures from being targeted by ISDS claims. Moreover, these tribunals have blurred the lines between the defense of necessity and GATT-style carve-outs which are meant to exist on different planes. While necessity as a defense is deployed after a breach has been found, a carve-out[1] aims at excluding ex ante certain actions from substantive treaty provisions. However, the aforementioned interpretation of GATT-inspired carve-outs in Infinitio Gold and Eco Oro has raised concerns about the suitability of carve-outs in new-generation treaties altogether.
Infinitio Gold and Eco Oro alone should not indicate that carve-outs as tools for safeguarding the state’s capacity to protect the environment have hit a dead-end. Rather, they serve to illustrate that GATT-inspired carve-outs such as those contained in Article 5.4 of the Model India Bilateral Investment Treaty (“India Model BIT”) and Article 6.4 of the Investment Cooperation and Facilitation Treaty between Brazil and India (“Brazil-India BIT”) may not be the best way to protect the policy space required for effective environmental reforms. Further, at the time of writing this article, India was negotiating Investment Instruments without much clarity on environment-related provisions therein. Against this backdrop, it may not be practical for the parties involved to continue with GATT-inspired carve-outs.
Considering the emphasis laid by the Infinitio Gold and Eco Oro tribunals on balancing environmental and investor rights, treaty parties should reorient their approach towards carve-outs. In this regard, they should consider carve-outs that exclude environmental measures from the scope of potential ISDS claims and allow investors to present such claims before a separate mechanism within the framework of the respective Investment Instruments.
III. India’s Investment Instruments
At the time of writing this post, India has been negotiating Investment Instruments with the European Union (“E.U.”), United Kingdom (“U.K.”), Sri Lanka, and other countries. Other Investment Instruments have recently been concluded with Brazil, Kyrgyzstan, and Japan. However, these treaties do not contain uniform and effective environmental protection provisions or carve-outs. For Instance, Article 5.4 of the India Model BIT and Article 6.4 of the Brazil-India BIT provide that non-discriminatory measures taken to protect the public interest and further objectives such as protection of environment protection shall not amount to expropriation.
Though differently worded than Article 2201(3) of the Canada-Colombia BIT, Article 5.4 of the India Model BIT and Article 6.4 of the Brazil-India BIT are inspired by Article XX of the GATT. Consequently, they leave room for arbitral tribunals to determine if a measure was non-discriminatory. For instance, Article 6.4 of Brazil-India BIT provides:
“Non-discriminatory regulatory measures by a Party or measures or awards by judicial bodies of a Party that are designated and applied to protect legitimate public interest or public purpose objectives such as public health, safety, and the environment shall not constitute expropriation under this Article” (emphasis added).
Similarly, Article 5.4, India Model BIT provides:
“. . . [N]on-discriminatory regulatory actions by a Party that are designed and applied to protect legitimate public welfare objectives such as public health, safety, and the environment shall not constitute expropriation” (emphasis added).
Though the two abovementioned provisions are similarly worded, Article 6.4 of the Brazil-India BIT has a broader scope and includes pronouncements of judicial bodies in the host states. This may be a cause of greater concern in India, as the higher judicial bodies have usually taken cognizance of environmental and public health-related issues. This increases the possibility of claims by investors in the event that a judicial pronouncement encroaches upon certain investments. Further, there being no express exclusion of liability, along the lines of what was expressed by the Eco Oro tribunal, such claims (if initiated) are likely to be decided in the favor of the investor.
Further, with tribunals having the power to determine if a measure is non-discriminatory, awards have the potential to restrain judicial, administrative, or legislative measures that impact public policies directed towards the environment (p. 344-45). For instance, many tribunals have adopted broad views in interpreting what actions violate non-discriminatory standards, and have even drawn parallels with different sectors to determine if non-discriminatory standards were violated.[2] In this regard, the tribunal in Occidental Exploration and Production v. Republic of Ecuador observed that while determining if a treatment was non-discriminatory, the analysis could not be limited to the circumstances in one exclusive sector. Thus, even if the government of India implements environmental reforms, it cannot be said that such reforms will be immune from the scrutiny of an ISDS tribunal, as the tribunal may end up drawing parallels between what is discriminatory in the environmental sector with discriminatory actions in other sectors have different thresholds.
Another possible concern with the carve-outs under Article 5.4 of the Model India BIT and Article 6.4 of the Brazil-India BIT is that an ISDS tribunal constituted thereunder will not necessarily be bound by domestic law.[3] Hence, measures taken in furtherance of new or existing domestic environmental legislation may be of little relevance to the tribunal. An overview of the awards discussed above and the subjective nature of investment protection norms demonstrate that their interpretation is largely left to ISDS tribunals, who end up interpreting them inconsistently.[4] In this regard, the risk of facing ISDS claims, and the possibility of having to pay the pecuniary obligations of the award, has the potential to prevent India from implementing ambitious environmental reforms and force it to join a long list of other states who have faced a similar fate.[5] Consequently, GATT-inspired carve-outs may not be the most effective way to deal with possible environmental claims at a time when India plans to roll out environmental reforms.
IV. EIA Carve-Outs
Considering the apprehensions of “regulatory chill”, Indian policymakers should consider broadly worded and strategic carve-outs which exclude certain claims from the ISDS mechanism and provide an alternative forum for a certain class of claims within the treaty framework. In this regard, India may consider adopting a broadly worded carve-out, which excludes certain claims from the scope of ISDS, and directs such claims to an alternative forum within the framework of the Investment Instruments. To promote inter-party collaboration in respect of environmental reforms, the proposed mechanism should consist of representatives nominated by state parties to the respective treaties. Such representatives shall be tasked with the examination of claims concerning environmental measures excluded from the traditional ISDS mechanism.
A possible way to achieve the abovementioned mechanism is by adopting an EIA-based carve-out. This approach balances the interests of states and investors. EIAs have primarily been used for screening investments to assess the potential impact of planned investments in the host state’s territory. However, ex-post EIAs can be deployed for assessing the ongoing impact of investments on the environment. This can aid the mechanism in its assessment of an investor’s claims based on scientific parameters. Additionally, the mechanism could allow claims from host states against certain investments, should the EIAs demonstrate adverse effects on the environment of the host state.
V. The Road Ahead
While the utility of EIA carve-outs can be determined once they are put to the test, their balanced approach makes them more likely to succeed than GATT-inspired carve-outs. First, EIA carve-outs can be brought to life by modifying existing Investment Instruments of India which have a relatively higher focus on environmental protection. For instance, the Comprehensive Economic Partnership Agreement between the Republic of India and Japan (“India-Japan CEPA”) could serve as a basis for the proposed carve-out. Article 8(1) of the India-Japan CEPA acknowledges the right of each state party to establish and regulate environmental policies domestically. Further, Article 99 provides that state parties shall not waive environmental measures for the promotion of investments.
The abovementioned provisions are broad enough to serve as a basis for further amendments to include EIA carve-outs. In this regard, the stakeholders may consider including the requirement for furnishing EIAs by investors. One of the possible ways to implement this can be to impose requirements mirroring environmental obligations contained under Articles 8(1) and 99 of the India-Japan CEPA. Consequentially, the envisioned provision would require state parties to consider EIAs by investors, to assess the viability of certain investments within their territory. Alternatively, EIAs could be mandated under the local environmental protection legislations, which will have to be complied with at the time of investing, and throughout the duration of the investment.
Further, stakeholders should deliberate on the structure of the proposed alternative forum. To ensure fairness and transparency, they may consider having representatives of all the state parties as adjudicators of the proposed forum. Eventually, when a claim captured by the carveout arises, the Investment Instrument shall require the aggrieved party to refer the claim to the proposed forum. Considering the nature of environmental reforms, it may also be of interest to the Government of India to negotiate a two-way mechanism with regard to the proposed forum. Given the involvement of EIAs, the Investment Instrument can provide for host states to refer infringement proceedings against investors before the proposed forum.
The proposed provision would impose greater environmental obligations on investors by requiring them to furnish EIAs concerning their investments. Additionally, should investors have concerns about certain environmental measures, their claims will be referred to the proposed forum. Further, the provision should allow host states to bring claims before the proposed forum based on the EIAs submitted by the investors themselves. Thus, apart from furthering the agenda of climate change, the EIA carve-outs will serve as an additional layer to further intra-governmental cooperation in the field of climate change, a step recently suggested under Recommendation 4 of the Draft Legislative Guide on Investment Dispute Prevention and Mitigation.[6]
Conclusion
Eco Oro and Infinitio Gold have demonstrated why GATT-inspired carve-outs may not be the ideal way to shield India from possible ISDS claims based on its environmental policies. Considering the recent environmental mishaps in India, it is likely that stricter environmental reforms are on the horizon. However, considering that India is negotiating several Investment Instruments at the same time, it may be the right opportunity to put such a provision to test and spearhead the ISDS reform movement in light of climate change.
The proposed carve-out reflects the desired balance required to address environmental issues, as it allows the involvement of all stakeholders under an Investment Instrument (states and investors) equally in the adjudicatory process. The involvement of state representatives in the proposed forum may raise concerns regarding the fairness of the entire process. However, this proposal must be understood in light of climate change—which requires states to meet various obligations to safeguard climate concerns. The success of the proposed mechanism can only be known if becomes a reality. However, given the balanced approach of the carve-outs, this approach has the potential to set the right tone for environmental reforms within ISDS in the global south and inspire similar reforms at a time when some countries have entered a state of regulatory chill.
*Arijit Sanyal is an Associate at Skywards Law, New Delhi with the International Disputes & Litigation Team, and a lawyer qualified to practice in New Delhi. Arijit has acted for clients before the Supreme Court of India, High Court of Delhi and Gujarat, and arbitrations administered on an ad-hoc basis and by the ICC, LMAA, SIAC etc. Besides work, Arijit is a Core Team Member of the Moot Alumni Association of the Vis Moot. Arijit has studied arbitration law at the Arbitration Academy in Paris where his essay on climate change and investment arbitration was awarded the “Laureate of the Academy” prize.
**Eshan A. Chaturvedi is an Associate at Skywards Law with the International Disputes & Litigation Team, and a lawyer qualified to practice in New Delhi. Eshan has acted for clients in a series of domestic and international disputes seated in India as well as the U.K., Singapore and MENA under the ICC and SIAC Rules. Eshan has been involved in advising investors and businesses planning to set up an entity in India. Eshan has studied international law at the Hague Academy for Private International Law.
[1] Aarushi Gupta, Eco Oro v. Columbia: Is GATT Article XX to be Blamed?, 89 Int. J. Arb, Mediation & Disp. Mgmt. 21, 27-28 (2023).
[2] Lu Wang, Non-Discrimination Treatment of State-Owned Enterprise Investors in International Investment Agreements, 31 ICSID Rev. – Foreign Inv. L.J. 45, 54.
[3] U.N. Secretary-General, Paying Polluters: The Catastrophic Consequences of Investor-State Dispute Settlement for Climate and Environment Action and Human Rights, ¶ 33, U.N. Doc. A/78/168 (2023) [Paying Polluters].
[4] Wang, supra note 2.
[5] Paying Polluters, supra note 3 at ¶ 50.
[6] U.N. Commission on International Trade Law, Working Group III, Draft Legislative Guide on Investment Dispute Prevention and Mitigation, U.N. Doc. A/CN.9/WG.III/W.P.228 (2023).
Mar 15, 2024 | Content, HILJ-HIALSA International Arbitration Collaboration, Online Scholarship
Marios Tokas*
I. Introduction
At the end of ‘Τhe Graduate,’ the protagonist duo happily sits in the back of the bus together. As the music plays on, the duo starts becoming less and less happy as they think about their future and the repercussions of their actions, since Elaine has just fled her wedding to run out with Benjamin to an uncertain future.
The ending scene of ‘The Graduate’ resembles the situation in the aftermath of the denunciation of the Energy Charter Treaty (ECT) by various E.U. member states (including France, Germany and the Netherlands) and the proposal for a so-called coordinated exit together with the E.U. This move radically differs from the E.U.’s previous stance. The E.U.’s previous position, based on a 2022 agreement in principle, favored the adoption of a ‘modernized’ version of the ECT which purported to reduce the protective scope for ‘climate-dirty’ investors.
The coordinated exit will entail two parts: 1) denunciation of the ECT by the E.U., as a member of the ECT, and of the E.U. member states; and 2) an inter se agreement between the E.U. and its member states intended to terminate the 20-year sunset clause in the ECT concerning existing covered investments.
This move has been met with enthusiasm by climate think-tanks which have been advocating for an exit from the ECT for quite some time, calling the ECT a ‘climate-wrecking treaty.’ However, this enthusiasm has gradually faded as disputes continue to arise, politicians with anti-climate agendas are elected, and many states exploit the climate emergency to pursue a protectionist agenda which includes export controls, restrictions in critical raw materials trade, and nationalizations of investments.
Without getting into the debate over the impact of the ECT on the E.U.’s climate goals and the climate policies of the E.U. member states, it is useful to examine what happens next. No politically viable legal instrument is available to replace the ECT at the moment. Meanwhile, the old ECT remains relevant due to its 20-year sunset clause (Article 47.3 ECT), which extends protection to covered investors and investments for 20 years after a party’s denunciation of the ECT. Any investment made before the end of the withdrawal notification’s one-year notice period is also protected under the sunset clause.
In the present article, I provide some reflections on the legal and policy considerations of the uncertain future of investment arbitration in the E.U. in light of the ECT’s apparent collapse.
II. Reasons for the Coordinated Exit
The first argument in favor of the coordinated exit is that it will ensure legal security and predictability within the E.U. and boost climate change cooperation among the E.U. member states. This argument is premised on the fact that many E.U. member states’ energy and environmental policies have given rise to numerous large investor-state dispute settlement (“ISDS”) claims by E.U. investors. The E.U. has recently ramped up its policy interventions on climate change as part of its Green Deal; new initiatives include mandatory emissions reduction targets, stricter environmental regulations, and subsidies for renewable energy. The E.U. and its member states want to ensure that the Deal is not derailed by ISDS claims. In other words, the elimination of such claims will prevent regulatory chill that could hamper the carbon neutrality targets set by the bloc.
This leads to the second main argument for an exit: after the Achmea and Komstroy judgements from the Court of Justice of the European Union, and the decisions of several E.U. domestic courts, any new intra-E.U. claims would now be incompatible with E.U. law. Despite these proclamations, all but one arbitral tribunal have rejected all jurisdictional objections based on the various intra-E.U. allegations. Investors simply enforce their intra-E.U. awards in other jurisdictions. Indeed, investors have traditionally had no issue in resorting to U.S. courts to enforce intra-E.U. claims, aside from one recent and heavily criticized exception, and have also enforced awards in the U.K. and Australia. With the coordinated exit, the E.U. and its member states want to ensure that no new claims will be made.
The last argument in favor of the coordinated exit is the desire to avoid claims from carbon-intense industries. Even if these claims fail at the merits stage, they have significant costs. The costs of the proceedings have frequently angered E.U. member states.
III. Much Ado About Nothing?
However, the real question lies in whether the coordinated exit can in fact achieve these three objectives.
A. Application of the Coordinated Exit in the Intra-E.U. regime: Uncertainty Remains
The legal effects of the coordinated exit are twofold. First, the exit will be considered an inter se modification of the ECT under Article 41 of the Vienna Convention on the Law Treaties (“VCLT”) with regards to the ECT sunset clause. Second, the exit will be considered a withdrawal from the ECT (in light of VCLT Article 54 and ECT Article 47) for the rest of the ECT’s provisions. The second effect is not contested. By contrast, the effects of an inter se modification to the sunset clause have stirred substantial debate.
The first legal question is whether the inter se modification would be in accordance with Article 41 of the VCLT. Article 41 introduces two requirements:
- The modification should “not affect the enjoyment by the other parties of their rights under the treaty or the performance of their obligations” (VCLT Article 41(b)(i));
- The modification should “not relate to a provision, derogation from which is incompatible with the effective execution of the object and purpose of the treaty as a whole” (VCLT Article 41(b)(ii)).
Academic discourse on whether the inter se modification would meet these criteria remains divided.
An additional lingering issue lies in the operation of ECT Article 16. This provision prohibits the conclusion of a subsequent agreement by parties to the ECT concerning the subject matter of investment protection (ECT Part III) and dispute settlement (ECT Part V) that is less favorable for the covered investors than the protections conferred by the ECT. Several investment tribunals have confirmed that an inter se agreement between E.U. member states cannot restrict access to dispute settlement for investors in intra-E.U. cases. However, ECT Article 16 does not apply to sunset clauses: the sunset provision, ECT Article 47, is not situated in Parts III or V of the ECT.
Still, arbitral tribunals have reiterated that ECT Article 16 evinces an intent by the ECT’s parties to preserve the rights of investors and investments to access dispute settlement—a major plank of the Treaty. Therefore, restrictions such as the removal of the sunset clause could be considered “incompatible with the effective execution of the object and purpose” of the ECT, contrary to VCLT Article 41. It cannot be taken for granted that tribunals will consistently side for or against view. As long as inconsistency will persist, investors will keep bringing claims.
While the coordinated exit is unlikely to prevent investors from pursuing ECT claims in the coming years, legal uncertainty will remain. This is particularly due to the absence of a mandated consistent approach among investment treaty tribunals. In addition, various factors such as the relevance of the law of the seat may play a crucial role in reaching divergent conclusions. For instance, the Green Power v. Spain tribunal, when accepting the intra-E.U. objection, placed considerable importance on the fact that the law of the seat for a Stockholm Chamber of Commerce (“SCC”) arbitration and the applicable law was Swedish law, which recognizes the primacy of E.U. law. To the contrary, ICSID arbitration is ‘delocalized’ (i.e. there is no ‘seat’); thus, the analysis of the Green Power tribunal is not transposable, as demonstrated by a recent decision.
Hence, the inter se modification, at least prima facie, does not ‘remedy’ the dissatisfaction of the E.U. member states with the intra-E.U. claims. Claims will continue to be submitted at the intra-E.U. level, since as previously explained, investment tribunals remain largely unaffected by the Achmea or Komstroy decisions and the coordinated exit will not necessarily nullify the sunset clause. Tribunals are generally not persuaded by the arguments of primacy of E.U. law over the ECT, and tend to dismiss the relevance of E.U. law in establishing jurisdiction— especially in ICSID arbitrations. Even a recent SCC award recently rejected the intra-E.U. objection, despite the respondent’s reliance on Green Power.
The only real disincentive for claims seems to be legal actions taken in the domestic courts of E.U. member states to ensure non-enforcement. However, as previously mentioned, non-E.U. jurisdictions still remain an option for enforcement.
Further, most intra-E.U. claims raised under the ECT were submitted by renewable energy investors and related to governmental incentives granted and then revoked by E.U. member states. Thus, the goal of avoiding intra-E.U. claims does not necessarily go hand in hand with the promotion of decarbonization. It can hardly be argued that providing additional procedural avenues for costly renewable energy investors would interfere with the E.U. Green Deal.
B. The Coordinated Exit does not Stop Extra-E.U. Claims
In case of a coordinated exit, the ECT sunset clause remains in place and effective between the E.U./member states and third parties. Specifically, the coordinated exit will only apply between the E.U. and member states that have signed up for the exit, leaving third parties’ rights and obligations unaffected.
A few authors argue that the sunset clause could be set aside by virtue of a ‘fundamental change of circumstances’ argument. However, the legal standard to invoke this defense is rather high. Article 62 of the VCLT, which sets out the fundamental change of circumstances standard, has been consistently interpreted by international courts and tribunals, including the International Court of Justice (ICJ). The defense requires the cumulative fulfilment of strict conditions. Notably, the change should be ‘fundamental’ to the circumstances that constituted the essential basis of the consent of the parties to be bound by the treaty. Moreover, the change’s impact must drastically transform the scope of the obligations that are still to be performed under the treaty. The ICJ in Gabčíkovo-Nagymaros denied that progress in environmental knowledge and the emergence of new norms in international environmental law constituted a fundamental change of circumstances. Generally, the ICJ has reiterated that the stability of treaty relations requires that Article 62 VCLT be applied only in exceptional cases.
For these reasons, a fundamental change of circumstances defense by the E.U. and its member states before investment treaty tribunals would likely fail. At a minimum, the defense will not yield a consistent outcome. In other words, the goal of reducing the costs related to arbitral proceedings by preventing the filing of new claims will not be met, even if a very genuine and convincing argument can be made with regards to the fundamental change of circumstances.
The power of the ECT sunset clause means that the ECT will continue to protect ‘dirty’ investments made by third-country investors in the E.U. (and vice versa) for 20 years. Thus, any alleged regulatory chill will continue to occur, especially given the fact that Switzerland and Japan remain parties to the ECT. At the same time, the decision by the U.K. to exit the ECT means that existing U.K. investments in the E.U. will be protected until 2045. Indeed, the 20-year sunset clause will continue to protect existing investments unless the U.K. agrees with the E.U. and its member states to join the coordinated exit, which seems to be a politically difficult decision post-Brexit. Additionally, ISDS mechanisms may see increased use given the World Trade Organization system deadlock, because ISDS provides an effective and enforceable alternative to challenge the E.U.’s trade-restrictive climate measures. Recently, a national court reiterated that extra-E.U. ISDS cases are compatible with E.U. law.
C. Exporting E.U.-Dirty Industries and Losing the ‘Climate Champion’ Role
The rest of the ECT parties will likely be stuck in a treaty that has been considered by think-tanks as ‘climate wrecking’ in the meantime. This outcome is far from positive. Many ECT members, who already lack ambition on climate change, will be regulated by the old ECT. It is hard to see how the ECT parties will agree on a modernization without the pivotal role of the E.U. The European Commission recently admitted how important it would be for the E.U. and its member states not to block the modernization of the ECT.
Non-modernization of the ECT provides incentives for E.U. investors to invest abroad and escape the E.U.’s tight regulatory environment, furthering the carbon leakage the E.U. is desperately trying to avoid with measures like its carbon border adjustment mechanism (“CBAM”). Simultaneously, E.U. investors will likely re-structure their investments through third countries to benefit from investment treaty protection. They could use an intermediate company in another ECT country (such as Switzerland), or even through states that have comprehensive BITs with E.U. member states (like the UAE and Singapore).
Even if the CBAM or other climate change measures ensure that ‘dirty’ investors will not export back to the E.U., these investors will seek other markets. However, climate change is a global negative externality. Even if the E.U. becomes climate-neutral, the issue will persist. In addition, E.U. investors will have an additional incentive to submit their ISDS claims as soon as possible due to the 20-year sunset clause.
In light of these potential developments, it becomes clear that the coordinated exit does not address the concerns of the E.U. in relation to its Green Deal goals and plan for carbon neutrality. There is little evidence that the ECT ever stood in the way of the E.U. and its member states’ more ambitious policies. At the same time, the need for further cooperation on climate matters exists mostly with respect to non-E.U. countries, especially considering new regulations linked with climate change such as CBAM. The E.U. has been trying to build its role as climate champion; however, at the most crucial time, it has elected to exit the discussion. The exit leaves significant fossil fuel extracting countries stuck with the allegedly ‘climate wrecking’ agreement.
Finally, regarding legal uncertainty and arbitral costs, it appears that denouncing the ECT might ironically also remove one of the more familiar tools we have for managing energy transactions—one that states can monitor, comprehend, and modernize, and one that the public can access. Moving away from the ECT and towards, for example, state contracts and concessions—or even worse, state contracts with stabilization clauses, would favour private contractual obligations, that would provide less policy space than the rules set in investment treaties. Indeed, investment contracts are more problematic than international agreements in terms of transparency and bargaining power, as local politics play an even bigger influence over their terms and conclusion.
IV. Conclusion
In my view, the coordinated exit as outlined above fails to address the goal of reducing ISDS cases that could potentially derail the green transition and is akin to burying our heads in the sand. A coordinated exit will not make the ECT’s climate issues disappear. The ripple effects of the E.U.’s exit will probably lead to a stagnation in climate change discussions and policies in many smaller ECT countries. The rise of geostrategic policies including nationalization of critical raw materials supply chains will likely require the return of the traditional investment law protections that are taken as given. Major oil-producing countries that previously demonstrated active interest in joining the modernized ECT, such as Nigeria, have lost interest after the E.U. announced its plans to exit. A better option would be for the E.U. to push for a more favorable ECT, even with fewer countries. The modernized ECT should include enforceable climate change obligations, exclude intra-E.U. claims, and introduce new procedural rules (e.g., security for costs to avoid frivolous claims) and modernized substantive obligations.
A modernized ECT could ensure a ‘reverse regulatory chill’: it could ensure support towards decarbonization which will not wither or change easily due to changes in the political landscape. States would not renege on the treaty’s climate change commitments without exposing themselves to arbitration proceedings. Ahead of the 2024 elections, the potential rise to power of climate change skeptic politicians in many countries constitutes a significant source of uncertainty on green transition plans. Binding legal provisions can ensure legal stability and predictability that is a conditio sine qua non for investments investment in green technologies and industries.
The various proposals by climate think-tanks presume that states will cooperate and agree on financing and capacity-building mechanisms. As many elections since the mid-2010s have demonstrated, a country’s support towards climate neutrality cannot be taken for granted. At the same time, the need for consensus for any change incentivizes any capital-exporting country to never denounce ECT in order to ensure that its investors have the capacity to sue.
What comes next? We have to wait for the sequel!
Marios Tokas* is a Teaching Assistant and PhD Candidate at the Geneva Graduate Institute (marios.tokas@graduateinstitute.ch). He would like to thank Michail Dekastros and Natalia Mouzoula for their comments and constant support, as well as the HILJ editorial team for their comments.
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Mar 7, 2024 | HILJ-HIALSA International Arbitration Collaboration, Online Scholarship
Editors’ Note: As part of the HILJ-HIALSA Collaboration on International Arbitration, HIALSA staff interviewed a series of eminent international arbitration practitioners about their experiences in the field and their approaches to international law. The following interview with Professor Alfredo Bullard is the first in this collection.
“Art, in various forms, contributes significantly to a lawyer’s life. It enhances performance, encourages creative thinking, and, most importantly, allows for a deeper connection with the narratives inherent in legal cases. It helps us to be much better lawyers.”
Professor Bullard
*Professor Alfredo Bullard is the founding partner of Bullard Falla Ezcurra+ (2000) and the partner in charge of the Madrid office. He is a member of the Court of the London Court of International Arbitration and a former member of the International Chamber of Commerce Court of Arbitration. Professor Bullard has appeared as either arbitrator, counsel, or legal expert in more than 300 international arbitrations, and was President of the commission that drafted the Peruvian Arbitration Law. He is also a Professor of Law at Pontificia Universidad Católica del Perú and has written and taught on issues in international arbitration around the world. Professor Bullard holds a law degree from Pontificia Universidad Católica del Perú and a LL.M. from Yale Law School.
HIALSA: Let’s begin by exploring your professional journey into law. How did you become passionate about law? Were there specific mentors who played a pivotal role in shaping your career?
Prof. Bullard: Law wasn’t my initial passion. When I encountered law in vocational tests, I emphatically declared that it was the last thing I’d pursue. My initial aspiration was to study literature and to become a writer. It was my father who, with pragmatic wisdom, convinced me that writers don’t necessarily study literature and that becoming a lawyer will allow me to traverse diverse domains. As I delved into law, my initial perceptions transformed. The rigid formality I once perceived gave way to an appreciation for its interdisciplinary facets and its ability to connect various disciplines.
HIALSA: Transitioning to arbitration, how did your interest in this field unfold?
Prof. Bullard: It’s a story similar to the one that explains why I became a lawyer. Initially, arbitration didn’t capture my interest. In fact, during my law studies, it seemed nonexistent, almost like science fiction. My perspective underwent a significant shift thanks to my colleague, Fernando Cantuarias. He pursued his LL.M. at Yale before me and strongly recommended that I take Professor Michael Reisman’s class on International Arbitration. Despite not listening to his suggestion, I became passionate about arbitration after witnessing Professor Cantuarias’ unwavering dedication to the field. I collaborated with him on Peru’s second Arbitration Law and took advantage of some of the things he knew. As I delved into it, I discovered that I enjoyed arbitration because it allowed me to understand the practical problems behind each case and to delve into other areas of law. Consequently, in the realm of arbitration, I assumed roles as both a litigant and an arbitrator.
HIALSA: You have a diverse professional and academic background as a professor, lawyer, and arbitrator. Do you find one role more personally fulfilling than the others?
Prof. Bullard: All of these roles mutually enrich each other, offering unique perspectives. If compelled to choose, my preference would lean towards my role as a professor. Teaching is not just a professional endeavor for me; it is a natural calling. Our firm has a distinctive approach, seamlessly integrating academic activities into our professional practices. This commitment involves turning academic endeavors into professionally viable ventures. I firmly believe that teaching is a reciprocal process, imparting knowledge to students while enhancing my own understanding of legal concepts.
HIALSA: At the end of 2022, Bullard Falla Ezcurra + opened its offices in Madrid. Could you share insights into the journey, and your vision for the future of the firm?
Prof. Bullard: The decision to establish our own law firm was driven by a desire to break away from the conventional firm structure. While my previous experiences in other firms provided valuable lessons, I was attracted to a model that allowed for greater flexibility and innovation. The journey involved navigating challenges associated with unconventional approaches in a field often characterized by rigidity.
Our firm offers distinctive interdisciplinary approaches, with a mission centered around creating a professional environment that seamlessly integrates scholarly pursuits. We have consciously invested in initiatives that some firms might deem unconventional, such as staging plays or writing books. The goal is to transform the legal profession into more than just a career but also a source of fulfillment and happiness for our team.
Looking to the future, we anticipate our firm’s continued growth and international presence, providing services that compete with those offered by international firms. This vision led us to establish a presence in Madrid, competing in a more open market with clients not necessarily tied to Peru or Spain. We position ourselves as smaller competitors to large North American or European firms, offering advantages such as our emphasis on interdisciplinary approaches.
HIALSA: We have heard of your passion for travel and theater. How do these personal passions contribute to both your personal and professional life?
Prof. Bullard: Traveling is more than a leisure activity for me; it serves as a source of diverse perspectives that enrich both personal and professional aspects. My recent visit to Africa not only altered my perception of nature but also challenged preconceived notions. Similarly, travel experiences in Singapore and Cambodia left a lasting impact. Living in Europe has further provided an immersive experience in rich cultural diversity. Thus, exposing myself to different legal systems and cultures during my travels has been invaluable and has complimented my work with a deep appreciation for diverse perspectives.
In my professional life, integrating art, particularly theater techniques, into legal education has been particularly rewarding. For instance, I collaborate with theater directors while preparing my students for arbitration moot court competitions. Law has also allowed me to write plays, such as “El Monstruo de Armendariz,” a play about a murder case and “La Apelación de Shylock”, a continuation of “The Merchant of Venice,” co-written with Professor Giovanni Priori. Currently, I’m working on another play called “El Señor de los Milagros” based on a real trial.
I truly believe that art, in various forms, contributes significantly to a lawyer’s life. It enhances performance, encourages creative thinking, and, most importantly, allows for a deeper connection with the narratives inherent in legal cases. It helps us to be much better lawyers.
HIALSA: In your view, what are the most pressing challenges currently facing lawyers and the legal profession?
Prof. Bullard: I believe a technological revolution is imminent, and only a select few lawyers will navigate it successfully. The world is changing rapidly, prompting a critical examination and swift modification of the decision-making processes.
It’s not just a question of whether advancements like artificial intelligence, new technologies, communication methods, or data processing systems will entail substantial change. Instead, I see it as a paradigm shift. As I discussed in a recent conference, we’re not merely asking if artificial intelligence will replace arbitrators; it will redefine the work we traditionally did through arbitration. The resolution of disputes will take a different form and adapting to this change will be a significant challenge.
HIALSA: Do you have any important advice for students starting law school or those pursuing graduate-level studies in law?
Prof. Bullard: Approach the study of law by maintaining a certain separation from it. While lawyers often develop a profound attachment to the law, it’s crucial to recognize its relativity and evolving nature. The essence of a proficient lawyer lies not only in their knowledge of the law but in understanding that law is a system regulating behaviors, with different competing rules. A skilled lawyer excels in reading, explaining, and understanding the law to achieve broader objectives—ensuring justice, making their client successful, and more.
A notable example is arbitration, the fastest-growing dispute resolution system. Its detachment from strict legal norms is evident in a study by the ICC, revealing that only 33% of awards issued under ICC rules cited relevant applicable law. In 70% of cases, the focus was on interpreting the contract itself. This shift underscores the importance of understanding contracts, which appears to be more crucial than a deep knowledge of the governing law.
HIALSA: If you had to identify an essential characteristic of a good lawyer, what would it be?
Prof. Bullard: Empathy. This characteristic emerges as a fundamental pillar for a lawyer and is rarely found in legal professionals. Understanding different perspectives is essential to achieve persuasion and make narratives relatable. Being empathetic with the other party contributes to increased persuasiveness because the court understands that you are trying to collaborate and contribute to resolving the dispute.
Empathy operates at every level—whether as a boss, witness, expert witness, lawyer, litigator, or arbitrator. Placing oneself in the other’s shoes makes a lot of sense because the essence of the law is nothing else than regulating human conduct.
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Feb 19, 2024 | HILJ-HIALSA International Arbitration Collaboration, Online Scholarship
Ariq Hatibie*
Introduction
The international system of investor-state dispute settlement (“ISDS”) is increasingly scrutinized for the challenges it poses to climate change mitigation efforts. Policies such as carbon taxes, fossil fuel bans, and nationalization are vulnerable to expropriation claims by investors, raising the costs and risks of the energy transition. I evaluate a proposed solution to make ISDS greener: the climate carveout. This treaty provision preserves regulatory capacity by stating that certain investments are not protected or that states can lawfully take specific measures based on the purpose of protecting the environment.
I argue that the literature overestimates the benefits of this reform. Even if states can include such carveouts in their international investment agreements (“IIAs”), investors possess procedural and substantive doctrinal tools to circumvent them. First, tribunals have used interpretive doctrines to hold that, while the measure is not per se illegal, states must still compensate the investor. Second, investors can exploit most-favored-nation (“MFN”) clauses to import more favorable treatment from other treaties to diminish the carveout’s effect. Finally, investors can forum shop to leverage other more favorable IIAs. The doctrinal and systemic features of ISDS combine to stymie the benefits of climate carveouts.
I. Introducing Climate Carveouts: Two Types
Climate carveouts come in two forms. First, they could exclude investments (e.g., in fossil fuels) from protection. Past examples in tobacco control include provisions that say, “[n]o claim may be brought under [this section] in respect of a tobacco control measure of a Party.” Hence, an investment-based carveout excises the investments from a tribunal’s jurisdiction ratione materiae. In contrast, a purpose-based carveout preserves a state’s right to take certain measures that protect the environment, enabling a merits-based defense. Such a provision could affirm the “right to regulate … to achieve legitimate policy objectives, such as the protection of … the environment …”
Climate carveouts have seen some success. Al-Tamimi v. Oman concerned revoking a mining company’s license for failing to get operational permits and other environmental violations. The U.S.-Oman Free Trade Agreement contained a clause the tribunal interpreted to “reserve a significant margin of discretion to themselves in the application and enforcement of their respective environmental laws.” Not only did the provision articulate the “right” to enforce environmental laws, but Article 17.2.1(a) provided that “neither party shall fail to enforce its environmental laws” (emphasis added), indicating a duty to protect the environment despite the agreement’s focus on free trade. The tribunal used this provision to interpret whether Oman had violated the treaty obligation to accord investors a minimum standard of treatment. Using Article 17.2.1 to inform its reading, the tribunal acknowledged that it must be “guided by the forceful defence of environmental regulation and protection provided in the express language of the treaty.” Al Tamimi demonstrates that inserting environmental clauses in IIAs can empower greener regulations.
II. Critiquing Climate Carveouts: An Optimistic Over-Estimation
Despite the above success, three features of the ISDS system mitigate the impact of climate carveouts: [A] interpretive clear statement rules that enshrine a duty to compensate, [B] MFN provisions that allow investors to import stronger investor protection provisions from other investment treaties, and [C] leveraging the flexibility of the global investment system to forum shop.
A. Circumventing the Carveout through Clear Statement Rules
One challenge to carveouts is articulating clear statement rules, as exemplified by Eco Oro v. Colombia. There, Colombia deprived an investor’s mining rights by declaring the relevant area an environmental zone. The Canada-Colombia IIA provided a carveout saying, “nothing in this Agreement shall be construed to prevent a Party from adopting or enforcing … environmental measures necessary to protect human, animal or plant life and health,” and “the conservation of living or non-living exhaustible natural resources.” Although both Colombia and Canada confirmed that this carveout intended to protect environmental measures, and although the language stated that “nothing” would prevent a party from regulating to protect the environment, the tribunal nevertheless stated that “there is no provision in Article 2201(3) permitting such action to be taken without the payment of compensation.” (emphases added). The investors prevailed because the treaty failed to explicitly deny the investor compensation: states can regulate to protect the environment—they just have to pay for it. In other words, the tribunal elucidated a clear statement rule, a presumption of the duty to compensate. As commentators have noted, tribunals “are well capable of creating interpretive deadlocks by convenient or erroneous readings of relevant provisions.” The tribunal’s clear statement rule imposes negotiating costs on states. Indeed, the judgment itself will likely place similarly worded agreements in investor crosshairs, and given that such language is common in, e.g., all of Canada’s newer trade agreements, one wonders whether negotiating those carveouts was worth the trouble.
Given that international investment law, and international law generally, does not contain rules of binding precedent, investors can try their luck even if precedents like Al-Tamimi v. Oman exist. Investors will likely take the risk because of the gargantuan monetary awards available. In Eco Oro, the investors sought a USD $350 million judgment, although the tribunal postponed actual quantification for a later date. Even if investor success is unlikely, the enormous potential reward renders the expected payoff worth it. This risk of arbitration continues to deter states from enacting environmental protections.
B. Using MFN Provisions to Import Looser Environmental Protections
Eco Oro demonstrates a circumvention method internal to the IIA. Another move is to use an MFN clause, which enables the investor to import more favorable treatment from other treaties into the one currently being applied (known as the “basic” treaty). A clause could read, “[n]either Contracting State shall subject investments in its territory … to treatment less favourable than it accords … to investments of investors of any third State.” MFN clauses are justified on the basis that investors from one country should not receive worse treatment than those of other countries. Using an MFN clause involves identifying another treaty with weaker environmental provisions and importing them to the present dispute. So far, investors have failed to use MFN to expand jurisdiction over the types of protected investments within a treaty. Hence, investment-based carveouts that remove fossil fuels from investment protection will likely not be affected. Rather, MFN clauses apply to the substantive treatment accorded to investments, which may affect carveouts that preserve the right to impose environmental regulations.
Indeed, investors have invoked MFN clauses to bypass carveouts in other subject areas. In CMS v. Argentina, the investors sought to avoid a clause providing that “[t]his Treaty shall not preclude the application … of measures necessary for … the protection of its own essential security interests,” under Article IX of the Treaty. They argued that because other treaties do not contain a similar “essential security interests” clause, the tribunal should treat the immediate Treaty as also lacking a clause. The tribunal rejected this reasoning, but only because an absence of carveouts in other treaties does not trigger the applicability of the MFN. If a similar clause does exist but with better treatment, the tribunal was open to considering its importation.
Consider a carveout in Treaty A, modeled on CETA, that preserves “right to regulate … to achieve legitimate policy objectives, such as the protection of public health, safety, the environment or public morals . . . ,” including a clarification specifically protecting the withdrawal of subsidies. Treaty B contains a similar “legitimate policy objectives” provision for public health and morals but without the environment. An investor could argue that both clauses deal with the same question: what counts as a “legitimate policy objective”? The absence of “environment” in Treaty B’s clause would suggest that for some nationals, the environment is not a legitimate objective, but for the other nationals affected by Treaty A, the environment is. Arguably, investors in similar circumstances are treated differently simply by virtue of a different nationality, potentially violating the MFN principle.
MFN clauses can account for more precise variations in protection: another treaty may specify that some environmental measures (e.g., withdrawal of subsidies) are protected but not others (e.g., expropriation of fuel investments). Another treaty might emphasize the duty to compensate. When negotiating carveouts, states may have to re-negotiate MFN clauses or pay attention to their entire inventory of treaties to minimize the importation of investment-protective clauses.
C. Finding Favorable Forums
Another investor strategy is exploiting the ISDS regime’s slipperiness to shop for a forum with more favorable protections. The tobacco carveouts provide a salient example. During negotiations of multilateral agreements, civil society organizations pressed governments to include carveouts for tobacco control, such as in the Comprehensive and Progressive Agreement for Trans-Pacific Partnership. However, states still belonged to other bilateral agreements, all of which could be used to forum shop. For example, while an Australian investor in Vietnam could not exploit the multilateral treaty to take Vietnam to arbitration, a bilateral treaty could still give them a cause of action. Pendas and Mathison observe that tobacco investors could use forty other investment agreements between the states parties to keep the arbitration door open.
In addition, investors can use an IIA with another country as long as they fulfill the personal jurisdiction requirements. If the corporation has a subsidiary or co-shareholder with a different nationality, it can launch a parallel claim to get another shot at the goal. If it cannot find another IIA, it can even restructure to find a country with more favorable investment protections, such as when the investor in Pac Rim v. El Salvador changed their seat of incorporation from the Cayman Islands to the United States to avail themselves of the Central American Free Trade Agreement. In practice, the “abuse of process” doctrine limits egregious instances of this forum shopping, particularly when the company restructures immediately before a foreseeable regulatory change. However, the strategic pathways for movement make corporations, especially transnational ones, difficult to tame. Thus, investors can forum shop in three ways: moving from the multilateral to the bilateral (or vice versa), across treaties, and across jurisdictions. The suppleness of the ISDS regime mitigates the impact of climate carveouts.
Conclusion
Despite the attraction of bolstering the treaty language to defend against arbitration claims, the above features diminish the effect of climate carveouts. First, investors can persuade the tribunal to interpret the treaty text through clear statement rules, as Eco Oro v. Colombia demonstrates. Second, investors can exploit MFN provisions to import more favorable rules from other treaties. Finally, investors can shop for the ideal forum by moving from the multilateral to the bilateral plane or restructuring to take advantage of other IIAs. Even if states can renegotiate treaty provisions to buttress against doctrinal moves, systematic features of the ISDS system will continue to grant protection. If investors can slip and slide through that system, the effect of carveouts, or the cost of making them effective, is not so rosy.
*Ariq Hatibie is a 3L at Harvard Law School broadly interested in public international law, including investment law and human rights. He holds an M.Sc. in Global Governance and Diplomacy from the University of Oxford and a B.A. in Global Affairs from Yale University.
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Jan 29, 2024 | HILJ-HIALSA International Arbitration Collaboration, Online Scholarship
Danilo Ruggero Di Bella*
Introduction
This piece traces the possible ramifications of third-party states’ actions in the context of investment arbitration. It explains how a third state’s action may have a “butterfly effect”: the third state’s action can prompt foreign investors to initiate investment arbitrations against host states different from the third-party state that carried out the action in the first place. Although to a certain degree, this is not a new phenomenon (multiple investment arbitrations have been triggered by the E.U. Commission urging the repeal of various state aids), it is certainly a rarer occurrence outside of an international organization. Within an international organization, it is relatively easier for the institutional governing body to direct its member states to commit a breach of their international obligations. For example, in Micula v. Romania, the host state breached its obligations towards foreign investors by repealing incentives that could have constituted illegal state aid in the eyes of the E.U. Commission.
Indeed, sometimes, third-party states’ or international organizations’ actions may prompt foreign investors to initiate arbitrations against their host state for a measure that the host state took in response to the initial third-party’s action. At times, unfortunately for the host state, this measure translates into a breach of an obligation the host state owed towards its foreign investors. Hence, a sort of butterfly effect takes shape.
The critical actions that will be discussed are Russia’s characterization of snow crabs as a sedentary species and Norway’s conflicting interpretation of a multilateral treaty, the 1920 Svalbard Treaty (originally known as ‘Spitsbergen Treaty’ after the name given by the Dutch explorer Willem Barentsz to the archipelago). These actions may have triggered a chain reaction of events bearing legal implications for Spain, due to Spain’s violations of its international obligations towards its foreign investors catching snow crabs around the Svalbard archipelago based on Spanish fishing permits.
First, this piece will provide a brief overview of the snow crab industry and its origins. Second, it will discuss Russia and Norway’s controversial stance on the snow crabs. Third, it will explain the inconsistency of Norway’s isolated view of the 1920 treaty regulating the status of Svalbard. Finally, it will illustrate the potential investment arbitrations that can be filed against Spain for revoking the snow crab-catching permits for Svalbard from its foreign investors.
I. The E.U. Snow Crab Fleet
In 2012, E.U. trawlers began harvesting snow crabs, a relatively new species in Europe’s waters. This novel activity is a highly profitable business (reportedly, each snow-crab trawler yields one million euros per month on average), and arguably an environmentally friendly practice. Indeed, snow crabs are infesting Europe’s waters, since they are a non-indigenous species (p.6) migrating from the Russian coast where they were artificially introduced in the 1960s. Being an alien species prone to overbreeding, they end up harming the ecosystem if they are not regularly caught.
The European Commission has been authorizing a few member states—specifically, Spain (ANNEX IB p. 99), Estonia, Lithuania, Latvia, and Poland (ANNEX III p. 149)—to issue permits to catch snow crabs. A trawler flying the Spanish flag—the Adexe Primero—pioneered the catch of snow crabs in Europe in 2012. The Spanish vessel focused its activities in the “Loophole” area, a small portion of international waters between Norway and Russia in the Barents Sea, and the waters surrounding the Svalbard archipelago. This vessel carried out its activities on the ground of the fishing permits issued by Spain, specifically, a Northeast Atlantic Fisheries Commission (“NEAFC”) zone permit for the Loophole area and a Svalbard Zone permit for Svalbard waters.
Vessels of the contracting parties to the NEAFC can get a permit from their flag state to freely catch unregulated stocks—such as snow crabs—in international waters (like in the Loophole area). Similarly, vessels of the signatories to the 1920 Svalbard Treaty can get a permit from their respective flag States to fish around Svalbard on the same footing as Norwegians. Both of Adexe Primero’s fishing grounds proved to be so profitable that other E.U. and Norwegian vessels followed suit.
II. Crimea Sanctions and Russia’s View on Snow Crabs
Following EU sanctions on Russia for the 2014 annexation of Crimea, Russia retaliated by obstructing E.U. vessels fishing in the Barents Sea. For instance, on 16 July 2015, the Adexe Primero was seized by a Russian patrol boat while fishing in international waters in the Barents Sea (as proved by the satellite-based vessel monitoring system onboard). The seizure was prompted by the detection of fishing pots with foreign signs in Russia’s Exclusive Economic Zone (“EEZ”). The pots belonged to the Adexe Primero and to a Norwegian vessel (the Northeastern H-27-AV). It turned out that the pots had drifted on the current into Russia’s EEZ. The Spanish vessel was then released after posting a bond.
In July 2015, Russia’s retaliations built up to a declaration that defined snow crabs—usually fished by E.U. vessels in the international waters of the Loophole—as a sedentary species living on the continental shelf (p. 339). As such, the exploitation of this valuable resource should be up to the coastal states, i.e., Russia and Norway, the latter of which joined Russia’s declaration.
The Loophole in the Barents Sea is located in international waters, as Russia’s and Norway’s EEZ cannot extend further than 200 nautical miles out to the sea (the Loophole is squeezed between the two EEZs). However, the continental shelf can extend up to 350 nautical miles as per Article 76 UNCLOS, thus engulfing the seabed underneath the Loophole. Therefore, the continental shelf below the water column in the Loophole can be subject to Russia’s and Norway’s jurisdiction, despite the water column above being on international waters. By defining the snow crab as a resource of the continental shelf (instead of a high-seas fishery resource), the coastal states (Russia and Norway) gain otherwise nonexistent jurisdiction over this precious resource and the right to exploit it exclusively, while simultaneously eroding one of the freedoms of the high seas, the freedom of fishing under Articles 87 and 116 UNCLOS.
Interestingly, the characterization of crabs as a sedentary species is not univocal and is rather arbitrary, often driven by national economic interests. Japan (a traditionally distant-water fishing country) considers crabs as a high seas fishery resource. Arguably, crabs’ ability to migrate defies their sedentary feature. Other states—mostly, coastal states (such as Canada (p.14))—hold that this crustacean is a sedentary species. It remains unclear whether crabs are sedentary or high-seas species. For example, Brazil considers lobsters sedentary, whereas the UK does not (p. 9). Accordingly, the classification of crustaceans is often a contentious issue.
Following Russia and Norway’s joint declaration, in August 2015, the E.U. recommended that its member states suspend the permits to catch snow crabs in the Loophole. Accordingly, Spain suspended Adexe Primero’s permit to fish in the NEAFC zone. According to the accounts of the E.U. shipowners and captains involved, other E.U. member states instead disregarded the E.U.’s recommendation and allowed their trawlers to keep fishing in the Loophole. Finally, in September 2015, Spain followed the example of the other member states and lifted the suspension of Adexe Primero’s permit for the NEAFC zone. Spain then renewed Adexe Primero’s permit for 2016. However, in March 2016, Spain suspended the permit for the NEAFC zone once again and eventually stopped issuing it altogether, apparently out of deference to Russia’s stance.
III. Norway’s Breaches of International Legal Obligations
The 1920 Svalbard Treaty governs the international status of the Svalbard archipelago. Just a year earlier, in 1919, the geographer and explorer Robert Neal Rudmose-Brown described the archipelago as a no man’s land whose natural resources have been explored and exploited by a variety of states since its discovery. In the aftermath of World War I, the need to establish some sort of local authority to administer the international community living on the archipelago and to avoid the archipelago’s militarization led to the negotiations of the Svalbard Treaty.
The contracting parties to the Svalbard Treaty gave Norway sovereignty over Svalbard but allowed the joint and peaceful exploitation of the archipelago’s natural resources by a variety of nations. The Treaty accords to the nationals of each contracting state the right of economic activity on an entirely equal footing (p. 128) with Norwegian nationals, thus preserving (p.2) the terra nullius status of the region (specifically based on Articles 2, 3, 6, and 7). By virtue of this Treaty, Svalbard became the only land state territory of common use (p.IV) in modern international law.
However, over time, Norway has discriminatorily restricted the commercial access of the other signatories’ citizens based on nationality requirements. Meanwhile, Norway has disavowed the Svalbard Treaty by depriving its provisions of their original meaning: to constrain Norway’s sovereignty over the archipelago in favor of the international community’s acquired rights. Norway has also relied on the Treaty to extend unrestrained sovereignty on the waters surrounding Svalbard up to 200 nautical miles and, accordingly, to expand its maritime boundaries bordering Greenland.
Thus, Norway inconsistently interprets the geographical scope of the Treaty: on the one hand, Norway holds that the Svalbard Treaty applies only up to 12 nautical miles off the archipelago; on the other hand, Norway stretches its maritime boundaries with Greenland up to 200 nautical miles off Svalbard by relying on the same treaty notwithstanding the fact that, according to Norway’s own interpretation of the Treaty, Norway’s sovereignty over Svalbard should be constrained to 12 nautical miles around the archipelago.
Russia and the EU object to Norway’s interpretation of the Treaty (as every other contracting party does), since if it was not for the Svalbard Treaty, Norway could not set its border at 200 nautical miles off Svalbard. Hence, either the Svalbard Treaty applies up to 200 nautical miles off Svalbard and Norway retains its current maritime border with Greenland, or the Treaty applies up to 12 nautical miles and Norway’s maritime borders (as well as its territorial jurisdiction) should be downsized accordingly.
Should the territorial scope of application of the Treaty be up to 12 nautical miles off Svalbard’s baseline, the portion of water between its outer edge and Greenland’s EEZ would be considered high seas. Should Svalbard’s continental shelf stretch further than 12 nautical miles into the high seas, the Svalbard Treaty would apply to that zone anyway, since the continental shelf is a prolongation of Svalbard’s land territory.
Therefore, regardless of the geographical scope of the Svalbard Treaty (either up to 12 or 200 nautical miles), this instrument should apply to the activity of snow crab fishing around Svalbard, because such activities occur on its continental shelf. Norway indeed considered snow crabs as a resource of the continental shelf in its 2015 joint declaration with Russia. Accordingly, the nationals of all contracting parties to the Svalbard Treaty should be allowed to catch snow crabs on Svalbard’s continental shelf just as Norwegians do.
Norway’s 2015 joint declaration with Russia concerning the sedentary nature of snow crabs might have seemed beneficial at the time to gain jurisdiction over this natural resource on the continental shelf underneath the Loophole. However, the same declaration backfires with respect to Norway’s interests in Svalbard. Indeed, the declaration indirectly obligates Norway to accord equal commercial rights to foreign snow crab trawlers on Svalbard’s continental shelf which, being a prolongation of Svalbard’s land territory, is covered by the application of the Svalbard Treaty. In other words, under Norway’s own interpretation of the Svalbard Treaty, E.U. trawlers should be able to harvest snow crabs on Svalbard’s continental shelf for the same reason they cannot catch them in the Loophole area. Of course, this is an unintended consequence of Norway’s policies on the two bodies of water (the Loophole and the Svalbard waters). The common denominator of the two policies is that they are both driven by national interest: both seek to let only Norwegians exploit snow crabs.
In June 2013, the Adexe Primero began fishing in Svalbard waters thanks to a permit granted by Spain based on the Svalbard Treaty. However, following Norway’s arrest of a couple of E.U. trawlers, in January 2017, Spain suspended the permit indefinitely, despite the EU’s recommendation to disregard Norway’s prohibition to catch snow crabs around Svalbard. Spain was indeed the only E.U. member state to adopt such a suspension (unlike Estonia, Lithuania, Latvia, and Poland). Initially, Span’s suspension was meant to be only temporally. However, it became a de facto revocation of the permit, as the suspension was never lifted.
Norway’s discriminatory actions have already led to investment arbitrations concerning the catching of snow crabs in Svalbard waters. Could Norway’s flawed interpretation of the Svalbard Treaty lead to similar repercussions for other states?
IV. Are Investment Arbitrations Drifting Towards Spain?
As noted, the E.U. member states who were granted snow crab catching permits by the E.U. reacted in different ways to Russia and Norway. On one hand, Estonia, Lithuania, Latvia, and Poland stood firm on their position and kept allowing their vessels to catch snow crabs in the Loophole and around Svalbard. On the other hand, Spain had repeatedly suspended Adexe Primero’s permits and, eventually, stopped issuing them altogether out of fear of Russia and Norway. Thus, Russia’s erosion of the freedom of fishing in the high seas (by defining snow crabs as a resource of the continental shelf) and Norway’s violation of the Svalbard Treaty may have led Spain to breach in turn its international obligations towards its foreign investors.
Spain’s repeated suspensions of the snow crab catching permits and their ultimate revocation have disrupted the activity of the Adexe Primero and its shipowner, Mariscos Polar SL, a company registered in Spain for the purpose of fishing snow crabs in arctic waters and whose shareholders hold Moldovan and Russian nationalities.[1] These Russian and Moldavian investors may invoke respectively the Spain-Russia Bilateral Investment Treaty (“BIT”) and the Spain-Moldova BIT to bring an expropriation claim against Spain. Spain directly expropriated the snow crab-catching permits and indirectly expropriated the foreign investors’ company operating thanks to those permits. Furthermore, the cumulative effects of the continual suspensions of the permits—culminating with their revocation—may well amount to a creeping expropriation.
Spain’s consequential expropriation of Mariscos Polar is worsened by the fact that the actions leading to this taking were not proportional. First, there was a lack of proportionality since Spain did not provide alternative fishing grounds to avoid the total disruption of Mariscos Polar’s business.[2] Second, the absence of proportionality is highlighted by the fact that Spain was the only E.U. member state to adopt such a harsh measure. Hence, even if Spain’s drastic actions may have been taken because of Russia and Norway, their lack of proportionality and compensation does not exempt Spain from its international obligations towards its foreign investors. Importantly, Article 6 of the Spain-Russia BIT and Article 5 of the Spain-Moldova BIT cover not only direct expropriations but also “any other measures with similar effects.” Hence, the applicable BITs allow for indirect and creeping expropriation claims.
Since fisheries are governed by an E.U. Common Policy, the treatment Spain accorded to Mariscos Polar should be contrasted against the treatment that other E.U. member states in the same position as Spain accorded to enterprises operating in the same sector as Mariscos Polar. If such treatment is more favorable than the one accorded by Spain, then Spain failed to accord Mariscos Polar the most favorable treatment it could have possibly accorded. Since the other E.U. Member-States did not suspend their snow crab permits, Spain breached the most favored nation (“MFN”) clause in Article 5(2) of the Spain-Russia BIT and Article 4 of the Spain-Moldova BIT.
Further, a Russian investor bringing a claim under the Spain-Russia BIT could also rely on the MFN clause to broaden the scope of the dispute resolution clause. This way, the investor may bring fair and equitable treatment (“FET”) and full protection and security (“FPS”) claims. For example, the investor may import the more favorable treatment accorded by the Spain-Lebanon BIT, whose dispute resolution clause extends also to violations other than unlawful expropriations. Whereas the Moldovan investor would not need to invoke the MFN clause for this purpose, since the dispute resolution provision of the Spain-Moldova BIT is not limited to expropriation claims.
Spain breached the FET standard towards its foreign investors insofar as it failed to protect their legitimate expectations concerning their investment, by generating an uncertain legal framework for catching snow crabs. Notably, the investors’ legitimate expectations were also backed up by the E.U.’s recommendation to ignore Norway’s prohibition of fishing in Svalbard.
Moreover, Spain failed to accord adequate legal protection against Norway’s subsequent claims to the fishing rights that Spain granted to its investors in the first place. Spain could have protected such rights by resorting to an international arbitration against Norway based on the 1929 Spain-Norway Treaty on Conciliation, Judicial Settlement and Arbitration. Not only did Spain fail to accord appropriate legal protection to her foreign investors to ensure the normal ability of their business to function, but it also deprived the investors of the title (viz. the fishing permit) to advance a possible investment claim against Norway (by invoking the Russia-Norway BIT).
Accordingly, the foreign investors may claim from Spain compensation for the damages suffered, the restitutio in integrum of the revoked permits, and their adequate legal protection through an international legal proceeding between Spain and Norway.
Conclusion
The snow crab affair illustrates how third-state actions may have a butterfly effect on the host state in international investment law. This is especially likely where the initial actions were ill-grounded and driven purely by national interests and the host state’s response did not take into proper consideration its international obligations towards its foreign investors. Crucially, should Spain disregard the interests of its foreign investors concerning the fishing of snow crabs in Svalbard waters, Spain would implicitly waive its international rights stemming from the 1920 Svalbard Treaty. Those rights include all maritime, industrial, mining, and commercial rights over the natural resources of the Svalbard archipelago. Thus, in the future, Norway may validly rely on Spain’s acquiescence to relinquish such rights—as per article 31(3)(b) of the VCLT—to prevent Spain from benefitting of Svalbard natural resources on an equal footing.
*Danilo Ruggero Di Bella is an attorney-at-law – member of the Madrid Bar and the Canadian Institute for International Law Expertise (CIFILE) – leading the law firm Bottega DI BELLA (www.bottegadibella.com). He holds a Master in Lawyering from Alicante University and an LLM in Investment Treaty Arbitration from Uppsala University. Danilo graduated in Law from Florence University with a specialization in public international law from Radboud University Nijmegen. He can be reached at: danilo.dibella@bottegadibella.com.
[1] Author interview with owners of Mariscos Polar SL.
[2] Author interview with owners of Mariscos Polar SL.
Cover image credit
